Sister taking mortgage loan to fund new practice for solicitor brother – Brother joining in mortgage deed as surety for sister’s obligations – Documentation showing sister to be principal borrower – Brother falling ill and defaulting – Mortgagee seeking possession – Sister claiming solicitors negligent in failing to give independent advice – Whether mortgagee entitled to assume brother or sister would inform solicitors that documentation not reflecting substance of transaction – Whether solicitors should have appreciated sister needing advice as surety
In 1982 Mrs A purchased a property for the sum of £23,500 out of her own resources. At all material times her brother, R, was in practice as a solicitor. In 1985 R wished to set up on his own, for which he needed financial assistance. Mrs A was anxious to help. R introduced her to the plaintiff building society, Northern Rock, which was willing to make an advance on the security of the property and knew both the purpose of the advance and that R was to make the repayments. Rather than make a loan to R on the security of his sister’s property, Northern Rock preferred to make the advance to Mrs A, as borrower, on the basis that R would join in the mortgage deed as surety for her obligations. R was on good terms with H, a partner in the firm of Hickmotts, solicitors, who agreed to act for Mrs A. Mrs A attended with R, and they each executed the mortgage in the presence of one of H’s partners, S, who, unlike H, did not know the true position.
R kept up the repayments until he fell ill and was adjudicated bankrupt in 1988. Mrs A, who had worked as his receptionist, then became redundant. No further repayments were made. In November 1989 Northern Rock sought possession of the property and Mrs A defended that claim, asserting that the mortgage was void, unenforceable or liable to be set aside on the grounds, inter alia, that it was procured by the undue influence of R. Mrs A sought damages against Hickmotts (the Hickmotts action) for breach of duty in relation to the execution of the mortgage. In consolidated proceedings in the county court, the judge dismissed Northern Rock’s claim in the consolidated action, made a declaration that the mortgage was void and unenforceable and dismissed Mrs A’s claim against Hickmotts. Both Northern Rock and Mrs A appealed. The judge delivered a further judgment holding that if, contrary to the finding in his earlier judgment, Hickmotts had failed to discharge the duty owed to Mrs A, then that breach was causative of the loss she had sustained. The judge found, inter alia, that: (1) Mrs A’s execution of the mortgage deed was obtained by undue influence; (2) Northern Rock was put on inquiry as to the possibility of undue influence; and (3) Northern Rock was to be treated as having constructive notice of Mrs A’s right to have the transaction set aside in equity.
The issue on the appeal in the consolidated proceedings was whether the judge’s conclusion was right that Northern Rock had not taken reasonable steps to satisfy itself that Mrs A had acted by a free and informed exercise of her own will. Northern Rock accepted that Mrs A’s role, in substance, was analogous to that of a surety, and that, given the potential for undue influence, she needed appropriate legal advice, which should have addressed in particular how far she could protect herself in the event of a failure by her brother to maintain payments under the mortgage: see Barclays Bank plc v O’Brien [1994] AC 180, at p196. Northern Rock submitted, inter alia, that: (1) the fact that there had been no private meeting without R’s presence was not determinative in a case where the transaction predated the guidance given in O’Brien (supra, at p196): and (2) the important requirement was that the lender should have reasonable grounds to be satisfied that Mrs A had received independent legal advice and, if so satisfied, was entitled to assume that the advice was approproiate and that Mrs A had entered into the transaction of her own free and informed will.
Held Northern Rock’s appeal in the consolidated actions was dismissed. Mrs A’s appeal in the Hickmotts action allowed.
1. In true surety cases, such as Bank of Baroda v Shah [1988] 3 All ER 24 and Massey v Midland Bank plc [1995] 1 All ER 929, it would be apparent, on the face of the documents, who was the surety and who was the principal borrower. In the present case, the documentation sent by Northern Rock to Hickmotts showed Mrs A to be the principal borrower and presented R, not Mrs A, as the surety. There was nothing to put a solicitor on notice that Mrs A required advice appropriate to the position of a surety (but see below). Therefore, it was not a case in which the lender was entitled to assume that the solicitor would know that such advice needed to be given. Northern Rock was not entitled to assume, on the basis of facts known to it through its officer, that either Mrs A or R would tell Hickmotts that the documentation did not reflect the substance of the transactions. Mrs A had not received the appropriate advice and there had been, as the judge found, undue influence and, therefore, Northern Rock could not escape constructive notice of her right to have the mortgage set aside in equity.
2. However, Hickmotts failed to do what reasonably competent solicitors would have done in the circumstances. S had not given the advice that Mrs A was entitled to expect. Although he himself did not know the true position, his partners did have information giving rise to the need to give appropriate advice. The firm was to bear the responsibility. Moreover, the court would not interefere with the judge’s finding that Mrs A would have withdrawn from the transaction had she received that appropriate advice.
David Phillips QC and Malcolm Stitcher (instructed by Irwin Mitchell, of Sheffield) appeared for Mrs A; Michael Brindle QC and Philip Kramer (instructed by Eversheds, of Newcastle) appeared for Northern Rock Building Society; Lindsay Boswell QC and Matthew Jackson (instructed by Wansbroughs Willey Hargrave) appeared for Hickmotts.
Carolyn Toulmin, barrister
